Thursday, July 18, 2013

Greg Mankiw's Blog: Observations on the Great Gatsby Curve

Greg Mankiw's Blog: Observations on the Great Gatsby Curve: "The application of this corollary to the Great Gatsby curve is that if we looked at Europe as a whole, rather than each nation separately, we would find that Europe as a whole has more inequality and less mobility than the individual countries. That is, Germans are richer on average than Greeks, and that difference in income tends to persist from generation to generation. When people look at the Great Gatsby curve, they omit this fact, because the nation is the unit of analysis. But it is not obvious that the political divisions that divide people are the right ones for economic analysis. We combine the persistently rich Connecticut with the persistently poor Mississippi, so why not combine Germany with Greece?"

I agree with Mankiw's analysis, but I'm not sure what his point is. Is it just that if you grouped the European countries together they would fall closer to the US on the plot? But the trend would still hold. I guess he's just saying the trend is pretty useless.

It seems to me that the point of the plot is to show that income inequality has the negative effect of suppressing mobility. Mankiw's argument debunks this conclusion, but he doesn't point out that it does.

The salient questions to me concerning income gaps are:

1. Does the gap hurt or help absolute wealth?

2. If the gap does increase absolute wealth, are the ills of having a separated society more significant than the benefits of absolute wealth?

I think he's addressing an argument that singles out the U.S. as having high inequality and low mobility as compared to Europe. The implication is usually that inequality results in low mobility, and so we need to reduce inequality to restore mobility.

As I understand it, Mankiw's point is that, yes, inequality does result in lower mobility. But that's only because they have farther to go between the different quartiles. Because we in the U.S. have a larger, more diverse population, a person has farther to go before he can move from one quartile to another.

I agree with you these inequality arguments don't get to the heart of the issue, and I think that's Mankiw's point, too.